Act now or face a bloodbath, Wall Street urges governments as virus hits markets

Fed cuts

While governments, especially in Europe, have been reluctant to turn on the fiscal taps, some market players are now expecting more drastic action to arrest declines. At Mediolanum Asset Management in Dublin, head of equity strategy David Holohan says “a significant step-up in fiscal stimulus” in the US could come in days. There could be similar measures in Europe, though these may come later.

As for the Fed, he says there may be another 50-basis-point cut before next week’s scheduled meeting, after last week’s emergency reduction failed to inspire confidence.

The firm hasn’t bought the dip yet, having turned underweight on stocks and added hedges earlier, head of investment strategy Brian O’Reilly said. US shares are still valued at about 17 times 2021’s earnings, compared with the sub-15 multiple seen during the sell-off in late 2018, he pointed out.

“Overall we expect declines in equities to continue until the co-ordinated response has a size where it offsets the impact from Covid-19,” said Peter Garnry, head of equity strategy at Saxo Bank. “What is happening now is that the oil price war and Covid-19 have increased the probability of a new credit crisis.”

‘Helicopter money’

As such, the stars may be aligning for extraordinary stimulus. “If fiscal expansion comes with explicit guarantee from the central bank to backstop any funding required, then you basically have the closest you get to ‘helicopter money’,” said Garnry. “It’s too early at this point, but it all depends on how the global pandemic plays out and whether we get another credit crisis.”

Ian Shepherdson, founder of Pantheon Macroeconomics, said on Twitter rising coronavirus cases in the US could see the Fed cut rates to zero and introduce a $1-trillion stimulus package. In the meantime, potentially brace for the treasury curve to fall near zero, with the S&P 500 tumbling further, he wrote.

Former Fed economist Claudia Sahm suggests the federal government should send money to people affected, push banks to ease pressure on borrowers and boost unemployment support. Bill McBride, who runs the Calculated Risk blog, has floated making all virus tests free and expanding insurance for the jobless.

So far, US President Donald Trump has directed his ire at the Fed, but more forceful measures may come as equity losses grow ahead of his re-election bid in 2020, given his long-standing obsession with stock performance, Mediolanum’s Holohan suggests.

“Having drummed up the fact that the economy is doing quite well and the stock market was at a high not long ago, he then needs to be seen to be taking action to try to arrest the rapid decline that we’ve seen,” he said.

Bloomberg